Locational determinants of cross border VC investments into developing countries

Date
2023-01-23
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Southern New Hampshire University
Abstract
This study investigated factors influencing US cross border VC investments into developing countries, whether these factors differ between the developing regions and characteristics of the most active US VC investment companies into these distant markets. As VC investors increasingly adopt global perspectives, their expansion into new frontiers of growth such as those in developing countries has grown. Securing VC financing is a key step towards growing developing countries startups since lack of access to external finance is one of the most cited obstacles to the growth of SMEs in these countries. However, cross-border VC investments suffer from increased information asymmetry risks as well as liabilities of foreignness in target portfolio companies’ host countries. Various methods were used to analyze the data and evaluate the hypothesis including – principal component analysis, fixed effects GLS panel data regression, and ANOVA. Our analysis shows that larger, older US VC investors with a global reach invested in developing countries. There is also a strong correlation between institutional quality, geographical distance, cultural disparities, and capital market development and cross border VC investment amounts in each developing country. Also, the four developing regions (Africa, MENA, Latin America & Caribbean, and Asia Pacific) differed significantly between each other in the four key locational determinants of cross border VC investments. Therefore, we conclude that institutional quality, geographical distance, cultural disparities, and capital market development are key determinants of cross border VC investments in developing countries. Keywords: venture capital, entrepreneurial finance, cross border investments, developing countries, target portfolio companies, SMEs.
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